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Crowdfunding as a Source for social Enterprise Financing

Advantages and Disadvantages Experienced by Social Entrepreneurs

Written by D. Hazam, D. Karimova & M. G. Olsson

Paper category

Bachelor Thesis

Subject

Business Administration>Entrepreneurship

Year

2017

Abstract

Bachelor Thesis: Social enterprise financing 2.3.1 Problems faced by social enterprises There are not many studies on social enterprise financing. Recently, it has been described as "an exciting new field in an already groundbreaking field" (Lyons & Kickul, 2013, p. 157). The importance of funding is obvious. It is an important determinant of business survival and expansion (Cassar, 2004), but it is also a major obstacle to social entrepreneurs (Lehner, 2013). The lack of funds for social enterprises is described as one of its main disadvantages to commercial enterprises (Bugg-Levine et al., 2012). In addition, social enterprises can anticipate resource scarcity throughout their existence, which is similar to the situation experienced by traditional entrepreneurs only at the beginning of their life cycle (Gundry, Kickul, Griffiths & Bacq, 2011). These issues limit the creation and development of social enterprises, making them one of the most pressing issues of social enterprises (Calic & Mosakowski, 2016; Clarkin & Cangioni, 2016). To understand the potential problems surrounding social enterprise financing, a starting point is to recognize that the purpose of social enterprises is not primarily to maximize profits (Martin, 2015). Some people believe that the profitability of many social enterprises is not enough to attract investors to participate (Bugg-Levine et al., 2012). Social enterprises can successfully produce social and environmental impacts of great value, but still face the problem of paying for the costs of obtaining funds (Bugg-Levine et al., 2012). The start-up stage is extremely risky, which means that given that social enterprises focus on social impact rather than wealth creation, it means that it is difficult to meet investors' requirements for risk-adjusted returns (Lyons & Kickul, 2013). Therefore, the so-called valley of death is usually a major obstacle between initial grant funds and investment funds for social enterprises (Martin, 2015). However, it is necessary to point out that becoming a social enterprise does not automatically mean uncompetitive financial results. For example, a study by Harding (2004) shows its importance for job creation and economic growth. Explaining why some social enterprises fail to generate enough income may be related to the challenge of monetizing social impact to some extent, which refers to the ability to generate economic income from the creation of social value (Lyons & Kickul, 2013). In this case, social enterprises may not find individuals to charge for their services, because value is created for the entire society, not just specific customer groups (Lyons & Kickul, 2013). 2.5 Crowdfunding as a new possibility In short, crowdfunding represents a large audience, among which a large number of people named “crowds” provide funds for projects and/or businesses (Belleflamme et al., 2014). Generally, the Internet is used to connect individual investors with investment opportunities without any intermediary intervention (Schwienbacher & Larralde, 2010). Therefore, companies that usually rely on a small number of highly sophisticated investment institutions for funding can take advantage of a wider group of supporters, each with relatively little contribution (Belleflamme et al., 2014). Crowdfunding generally involves three parties. The promoter is the party seeking funds, the investor is the party providing the funds, and finally the technology platform that connects the promoters and investors (Ordanini, Miceli, Pizzetti & Parasuraman, 2011; Quero, Ventura & Kelleher 2014). The crowdfunding platform allows Companies create financing opportunities for individuals, and they invest in relatively small amounts, which together may have a high overall impact (Belleflamme et al., 2014). Crowdfunding is usually divided into donation type, reward type, loan type and equity type. In short, donation-based and reward-based crowdfunding does not involve the crowd as investors. Donation-based crowdfunding is based on charitable foundations, which is a far cry from the traditional funding methods of aid organizations. Reward-based crowdfunding is a very common way for small businesses to attract funds for new products and projects, and it has been popularized through crowdfunding sites such as kickstarter.com and indiegogo.com. Rewards can be anything, from thank you cards to the company's finished products, so they are used to pay for the production costs of future products. However, in order for the public to become investors, loans or equity crowdfunding are used, in which the investor acts as a lender to the company or acquires equity in the company as an owner. In the case of borrowing or "peer-to-peer" lending, individuals borrow money in exchange for paying interest over time (Kirkby & Worner, 2014). In equity crowdfunding, investors invest directly or indirectly in new or established businesses and expect to share future profits (Belleflamme et al., 2014). 2.6 The potential of social enterprise crowdfunding Social enterprise crowdfunding is an emerging subfield in the literature. Lehner (2013) claimed that academic research in this field is almost non-existent, and there is no research in alternative funding for social enterprises, especially crowdfunding (Bergamini et al., 2015). Read Less